The subject of foreign trade is tricky and is going to be a mindbender for most people. This is another subject in our economy where we have been fed an appealing narrative, and, as a population, have largely accepted it as fact.
To maximise growth, we are told, a country must optimise exports and minimize imports. Nirvana, to a mainstream economist, is a large trade surplus allowing a sizable current account balance to be built up. This, in turn, by their thinking, allows fiscal space to be created to provide funding for the public sector and provide everyone with a better standard of living.
The scarcity narrative encourages the idea that the only way to enable an increase in public spending, on top of what the Government can accrue through taxation, is by taking currency from the foreign sector.
If you’ve been paying attention to the series so far, you’ll already know that this is not true for a number of reasons. As monopoly issuer of the national currency, a government is never financially constrained and can purchase whatever is for sale in that currency.
Once again, the concentration on money obfuscates the situation. The MMT insights highlight the reality that resources are what count. The goods being traded matter far more than the, intrinsically-worthless, monetary unit-of-account of Government.
The ability to purchase whatever is for sale in the domestic currency suddenly takes on an international context and extends the ability of the Government to provision the population. Imports allow the benefits of other nations’ resources and labour to increase the living standards of society, with no REAL cost to society.
Exporting is a real cost to a country. When a nation’s valuable labour time, materials, technological ability and education are spent on producing goods and services, this is value that the community needs. When it is sent away to another country, that is a real cost to society. The only reason to export goods is for the imports they allow you to acquire. It is imperative that any exports ensure good value for the exchange.
Warren Mosler explains it perfectly in Chapter 5 in his book The 7 Deadly Innocent Frauds of Economic Policy. I’ve linked to it before in the series, but have done so once again on the Mosler Economics website, well worth a visit, also linked below. He states that economics is the opposite of religion, ‘It’s better to receive than to give’ and that a nation’s wealth is measured by the its ‘pile of stuff’, all the goods and services it can produce plus all the goods and services it can import, minus its exports. He emphasises that ‘a trade deficit, in fact, increases our real standard of living’.
An important caveat to this view is that a nation requires resilience of supply in essential goods. As highlighted by the Covid Pandemic, when the global supply chain is disrupted, society depends on the government to step up domestic supply to meet the demand. Food and energy sovereignty, steel manufacture, Computer and software development, pharmaceuticals and medical supplies must be able to be produced domestically, when required. If the country can easily import these items at a cheaper price than the cost to produce them domestically, in normal times, there is a decision to be made on whether this is in the national interest. Never, lose the capacity to ramp up domestic production in an emergency situation.
Whatever can be imported and paid for with the national currency, releases domestic resources to be used on less essential, more life-enhancing projects. This is how the trade deficit can improve the national living standards. The move in Western Nations away from an industry based to service-based economy left millions unemployed and large swathes of the industrial heartland derelict and decaying. These released resources could have been re-purposed to productive advancement.
Instead, a proxy economy has been built in much of the West, based purely on currency and leveraging wealth to accrue more wealth at no benefit to society. In fact, the race for continued growth has lowered life expectancy, reportedly caused irremediable harm to ecosystems all over the world and is slowly eroding the standard of living for most of society.
The vast array of talent that the UK once boasted is depleted. The practical ability and productive capacity are a shadow of what they once were. The financial, insurance and property-dealing sectors suck in all the best minds, of the pool of youngsters that decide to remain in the UK after university. Instead of curing cancer or developing battery storage potential for wind and solar energy capture, they are creating algorithms to game the Foreign Exchange or Stock markets, virtually worthless in real terms to the population as a whole.
http://moslereconomics.com/wp-content/powerpoints/7DIF.pdf
http://moslereconomics.com/